RPT-Fitch Affirms Sodrugestvo at 'B'; Revises Outlook to Stable

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June 27 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Luxembourg-based Sodrugestvo Group S.A.'s (Sodru) Long-term foreign currency Issuer Default Rating (IDR) at 'B' and revised the Outlook to Stable from Negative.

The revision of the Outlook reflects Sodru's strong financial performance in FY12 for both sales and profits moderated in its effects on cash flow by further investments in working capital and dividend payments. Although Fitch expects the operating environment to be challenging in FY13 and that the consolidation of recent expansion projects will result in increased debt, we believe its third soybean crushing plant and other investments will meet increasing long-term demand for oilseeds meal and oil, therefore resulting in sustainable profits and steady de-leveraging after FY14. The collaboration agreement with Mitsui and equity injection in October 2012 further underpins the Stable Outlook with the assumption that Sodru will now pursue more conservative expansion and adhere to a de-leveraging path.

KEY RATING DRIVERS

Vertically Integrated Business Model

Sodru benefits from a vertically-integrated business model covering most soybean meal and oil production stages, from origination and beans storage to processing and product delivery. This model leads to lower business risks due to the high degree of control over the production cycle. This is offset by limited diversification beyond its core business lines.

Ambitious Investment Programme

Sodru is close to completing multiple expansion projects, related to enhancing its business profile as well as moving along the value chain, estimated by Fitch at USD400m by 2014. If effectively managed, we expect significant growth in FY14 albeit with a mild improvement in operating margins until the new assets are fully ramped up. Focus on leveraging its existing strengths and sequential execution of the expansion projects and new market entries could mitigate these risks.

Strong Industry Demand Drivers

Russia's soybean meal and oil production has recently been increasing and is forecast to meet increasing demand from industrialised meat processors as the sector is prioritised in the government's agriculture policy to ensure food self-sufficiency. The increasing global population and protein consumption should ensure growth of global soybean consumption, while increasing usage of biodiesel and stable demand for vegetable oil should secure demand for soybean oil. Fitch acknowledges Sodru's enhanced capabilities to produce in future other oils and meals such as rapeseed, which have high demand potential.

Weak Cash Flow Generation

Funds from operations (FFO) generation is weak due to a low operating margin and high interest burden. In FY13 (ending June 2013) and FY14, we do not expect Sodru will cover working capital investments and the last part of its capex programme with internally generated cash flows. However, we acknowledge Sodru's ability to fund these projects with multiple sources of financing and consequently we are comfortable that these investments will be fully funded. We estimate that Sodru will not start generating positive FCF until FY15. The Stable Outlook is premised on the assumption that Sodru will adopt a more conservatively funded expansion plan that retains earnings.

Strategic Alliance with Mitsui

Fitch considers the equity injection made by Mitsui & Co. Ltd of USD84m in October 2012 as a positive factor. Collaboration in origination and distribution of soft commodities will be beneficial for Sodru's operational profile. This mitigates Sodru's high FFO gross adjusted leverage -adjusted for readily marketable inventories (RMI) which is expected to peak at 4.7x in FY13 before reducing towards 4x expected for FY14. If Sodru receives additional equity injections, and proceeds are mainly used to achieve a permanent deleveraging, this would be deemed positive for the ratings.

RATING SENSITIVITIES

Future developments that could lead to a negative rating action include:

- Net lease-adjusted leverage above 6x (>4x RMI-adjusted) equivalent to FFO adjusted gross leverage (RMI-adjusted) above 5x

- Negative FCF in the mid to high single digits (% of sales) eroding internal liquidity

- Further decrease in operating EBITDAR margin below 6.5% in FY14 Future developments that could lead to a positive rating action include:

- Net lease-adjusted leverage below 4x (<3x RMI-adjusted) equivalent to FFO adjusted gross leverage (RMI-adjusted) below 3.5x

- FFO fixed charge cover (RMI-adjusted) above 5x

- Operating EBITDAR margin above 8% on a consistent basis

- Evidence of positive FCF, conservative business expansion funded by cash flows or equity rather than debt

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity

Sodru's liquidity is considered adequate in line with its current rating, comprising cash, liquid inventories (RMI) and available undrawn bank lines. We believe these sources of funds are sufficient to cover Sodru's short-term debt maturities, including its rollover of working capital lines. Although negative FCF in FY13 will stretch liquidity, we note that Sodru's latest business expansion is fully funded while other smaller projects are either scalable or financing is being arranged.